Latin American Capital Markets

CORPORATE GOVERNANCE AND CAPITAL MARKET DEVELOPMENT 449charter, the terms of the securities, and any representations made in the marketingmaterials amount to explicit contracts, usually enforceable in law. Other understandingsbetween issuers and investors—for example, that the company's voluntary governancepractices are in line with evolving market standards and expectations—maybe subtle (and less easily enforced). As investors in Latin American equity markets becomemore conscious of the shortcomings of governance during the debates overlegal reforms, direct negotiation between investors and companies with respect to thegovernance practices seems to have become more common.Two Brazilian IPOs, onefor ADRs issued before passage of the legal reform and another that was the first listingon the Novo Mercado, illustrate this tendency.Issuer-Investor Negotiation over Tag-along RightsUltrapar is a large Brazilian liquefied petroleum gas and petrochemicals distributioncompany. Its total sales amounted to almost $ I billion in 2001, 14 As of March 1,2002,its market capitalization exceeded $460 million. 15 Ultrapar decided to test the internationalmarket in 1999, offering nonvoting shares to U.S. investors through a sponsoredADR program listed on the New York Stock Exchange. The company had asolid reputation in Brazil for professional management and comparatively good treatmentof shareholders. Although descendents of the founder still held the largest blockof Ultrapar equity, day-to-day control of the company had long been entrusted to acadre of professional managers, many of whom had come to hold substantial amountsof shares themselves, mostly locked in trusts set up as part of their long-term compensationpackages.Despite Ultrapar's history of good shareholder relations, during the "roadshow" for the ADR offering, investors expressed concerns about the prospectivetreatment of shareholders in the event of a sale of control of the company. Neitherthe company nor its underwriters seemed to have anticipated the depth of investorconcerns during preparation of the offering. Given the existing control arrangementin the company (with the founder's descendents and senior management holding amajority of voting shares and a fair amount of nonvoting shares as well) and the natureof the industry, it was reasonable to expect a merger or takeover in the future,at which time a significant amount of the value of the company would be realized.Under existing Brazilian company and securities laws, there was no requirement that14 Currency is in U.S. dollars unless otherwise specified.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub15 Ultrapar's annual report is available at www.ultracom.br.